Dave Ramsey’s Baby Step #2: Pay Off All Debt Using the Debt Snowball

(Originally published October 6, 2013)

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Please note: This is a very brief summary of Dave Ramsey’s advice to getting out of debt. The following is paraphrased from Dave’s Complete Guide to Money, which is the book provided to everyone attending Financial Peace University classes.

Please also note: Dave Ramsey is VERY Christian. If that offends you and you would discount his advice because you can’t get past his religious beliefs, then you will simply be missing out on life-transforming information. It would behoove you to look past what doesn’t match with your own belief system and listen to the meat of the advice. If I was able to do it, you can do it.

Essentials for Getting Out of Debt

1) You must have “gazelle intensity.” Picture it: Discovery Channel. Gazelles grazing. Cheetah sneaks up. Gazelles sense him. Cheetah pounces. Gazelles run in every direction. Although cheetah is fastest land mammal on Earth, gazelles are adept at outmaneuvering. Cheetah gets a kill only about once in 19 attempts. If you are in debt, YOU ARE A GAZELLE!! RUN FOR YOUR LIFE OR THE CHEETAHS (AKA CREDITORS) WILL GET YOU!!

2) You must stop borrowing more money. As I said in my previous post, Dave’s advice is not rocket science! You must stop the bleeding in order for the wound to heal. Quit picking at financial scabs, quit stabbing yourself in the hand, QUIT USING DEBT! This is another “simple but not easy” tip. Debt is easy. Debt is everywhere. It can be FRIGHTENING to imagine life without credit if you’ve always relied on it. Do what you must to make yourself stop. Dave would have you cut up your credit cards!

3) You must have savings (see my previous post about Baby Step #1). Credit cards are not emergency funds. Money sitting idly in a bank account is an emergency fund!

4) Pray about it. Or meditate. Or talk to the universe. Or talk to your angels, guides, masters, and teachers. Or visualize light illuminating your bank account. Do whatever you do to connect into the fabric of what’s bigger than you. And if you’re a nonbeliever, post your financial goals all over your house and car and keep your eye on the prize at all times!

5) Be willing to do whatever it takes! A good defensive strategy is to know that you might not have a life for a little while. You might dress like a vagabond (not that I would know anything about that). You might miss your favorite performers when they roll through town. You  might need to say no to some things. You can also have a strong offensive strategy! You could get a part-time job to supplement your current job. You could do a purge of your house and make a pile of everything you can sell to make money. Have a garage sale or sell things individually online. I can’t tell you how many times I sold something on Craigslist just in time to allow me to pay a certain bill I otherwise wouldn’t have been able to pay.

The Debt Snowball

This is so simple it’s ridiculous…and yet if you aren’t using this technique, I can guarantee you’re treading water.

Here’s the plan:

  • Make a list of all your debts and order them from smallest payoff amount to largest payoff amount.
  • Make minimum payments on all debts except the top one on the list (aka “debt #1″—the smallest payoff amount).
  • Attack debt #1 with every bit of money you can spare each month (including the amounts you were paying above and beyond minimum on your other debts).
  • Once debt #1 is paid off, roll everything you were throwing at it toward debt #2 (plus the minimum you’d already been paying on debt #2). So, for example, maybe you were able to pay $300/month to debt #1. With it now paid off, you’re able to apply that $300 payment toward debt #2, which you’d already been paying $50/month on. So now you’re attacking debt #2 with $350, whereas you’d only had $300 to pay toward debt #1.

You’ll be surprised how big your payments become as you proceed with this plan (hence the “snowball” reference, as snowballs get bigger and bigger as they roll downhill and gather more snow). Think of this as a financial variation on the theme of “united we stand, divided we fall.” If you’re trying to pay just a little bit extra on every debt, you’ll get nowhere fast (it’s just the mathematical reality because most of each payment is likely going toward interest and very little is actually knocking down the principle balance).

The reason Dave advises ordering debts by payoff amount instead of by interest rate is because of the importance of little victories. In order to stay motivated and moving with “gazelle intensity,” you need to have consistent wins! You need to see that you’re making progress and gaining ground. The benefit of staying motivated FAR OUTWEIGHS the money you’ll save in interest by listing your debts in order of interest rate. How raging will you be able to keep your internal fire if you know it’ll take 3 years to pay off your balance with the highest interest rate? Yeah…that’s a setup for failure…

If you’re a member of Financial Peace University, Dave provides a free calculator that will help you figure out how quickly you can knock out all your debt. You can probably also find a similar calculator online for free.

Alright, gazelles! Let’s get out there and outmaneuver those cheetahs!!

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